War and decarbonization: Rewriting the UK and Europe's refining future

Eklavya Gupte (0:01)

Welcome to Energy Evolution, a podcast where we examine the forces shaping how we power, fuel and electrify our future.

I'm your host, Eklavya Gupte. And in this episode, we're looking at how the conflict in the Middle East is rippling through the fuel sectors. In particular, we're turning our attention to oil refineries, those vast, sprawling industrial complexes that transform crude oil into the refined products that power our modern world. With the U.S.-Iran war now stretching past six months, how exactly are these refineries coping? And more importantly, how is this crisis reshaping their strategies? Not just around production and exports, but around the question of decarbonization. Now, since the war between the US and Iran erupted back in February, energy security has dominated the thinking of governments and companies alike, especially those most reliant on imported oil. For months, we watched as the shipping through the Strait of Hormuz ground to a near standstill, sending prices, particularly prices, of refined products like diesel and gasoline spiralling and draining fuel reserves across the globe. But the bigger question is, what comes next? Will this crisis put fresh wind behind the refining sector, forcing governments to rethink energy security from the ground up? Or will it slow the momentum towards electric vehicles and renewables, as the industry leans on fossil fuels for a little longer to keep the lights? Or the tanks full?

And crucially, does decarbonization now have to be reimagined, not as a threat to energy security, but as part of the solution?

So today we'll be unpacking how the UK and European markets have weathered this crisis, and how it might yet reshape the biggest decisions facing the fuel sector for decades to come. Now, to help us make sense of all of this, I'm joined by my colleague Kelly Norways, who's been tracking this story closely, Kelly, welcome to Energy Evolution.

Kelly Norways (2:26)

Pleasure to be here.

Eklavya Gupte (2:28)

So Kelly, let's start broad. How has this conflict reshaped the calculus for Europe's fuel sectors? Are we seeing a fundamental shift in the way the region thinks about refining?

Kelly Norways (2:40)

Yeah. So before we entered this worst-case scenario, really, for the oil market with the US-Iran conflict, it looked like it could be relatively dire straits for the European refining market.

There's been well-documented challenges with competitiveness and a lot of the international energy companies that manage these refineries were kind of looking at their global portfolios and thinking that Europe looked like a less sure bet, essentially. That calculus has changed for the short-term this year. We've seen refining margins at least double in the last couple of months as a result of just the shock of the war, and that looks like it's on the uptrend, as we're kind of heading into the back end of the year.

So looking at the numbers today, as we chat August 28th, the European ultra-low sulfur diesel crack is something like $80 a barrel having hit an all-time high late July, and it looks like that pressure is only set to increase while we're in this current situation with the straight-forward moves. So what that means is that refiners are really running flat out to try and produce as much as they can. Margins look pretty good.

Earnings look good on the downstream side of things for a lot of the international energy companies. So it's definitely taken us away from some of the forecasts that we were seeing before this year that had margins even going negative, and perhaps stalls a wave of closures that had started to happen in Europe over the last couple of years. Last year alone, Europe saw 500,000 barrels per day of refining capacity shut for those reasons that I've just mentioned, and I don't think anybody's in a rush to close a refinery right now. I think even if that were potentially on the horizon for a refiner, clearly you're going to try and capitalize on what you can for the moment. I think where we potentially see a moment of reckoning is maybe coming up to the next maintenance season when you start to see these companies have to think about how much more money they're willing to pump in, what the long-term future looks like, and I'm sure we can get onto that. But that's kind of the tension that we're seeing in the market at the moment. Very good economic opportunity in the conventional fossil refining space, but to compete long-term, you need to be prepared to stump quite a lot of cash, either to pay for your emissions charges or to decarbonize and avoid those costs. And that long-term shift hasn't necessarily changed from what I heard in my conversation that we'll discuss later and also what we're hearing from our analysts.